At least for now.
Standard & Poor's credit rating agency announced on Friday that the freeze on repayment of debts of Agrokor, the largest Croatian privately-owned company, will not have an immediate impact on the “BB” credit rating of Croatia, reports Index.hr on April 8, 2017.
Standard & Poor's lowered on Wednesday long-term and short-term ratings of Agrokor from “B-/B” to “CC”, which means that there is a high probability of default, with a negative outlook, reflecting the opinion of the rating agency that the credit rating of the group could be further reduced to “SD”, which would indicate selective default. However, the crisis in Agrokor should not affect the credit rating of the country. S&P estimates that the potential fiscal impact on the state can be managed.
The report states that Agrokor informed the agency on 2 April that the company had reached an agreement with a group of lenders to freeze debt repayments. The standstill agreement was signed with six banks, and it was announced that its goal was to facilitate the efforts of the company to address the issues of liquidity and settlement of debts to suppliers, to ensure the continuity of operations, protect the value of the group, as well as to prepare the terrain for its sustainable restructuring.
On 5 April, S&P reduced Agrokor’s credit rating. “We believe that the standstill agreement is likely to represent a reduction in economic value in relation to the original conditions of Agrokor’s package of loans and that it would be unfavourable by our methodology,” announced S&P at the time.
In the latest report, S&P says that Agrokor employs about 40,000 people in Croatia (55,000 in total), accounting for about 2.5 percent of total employment in the country. In 2015, the group achieved revenues of 6.5 billion euros, which represented around 14.8 percent of gross domestic product of the country, while direct taxes to the state in the form of corporate taxes amounted to 247 million kuna or 33 million euros. In 2015, that amounted to only 0.2 percent of general government revenues or 0.1 percent of GDP.
S&P also notes that there are some 2,000 suppliers in Croatia which rely on Agrokor. Although problems in Agrokor's business operations may affect the Croatian economy, S&P estimates that the situation can be controlled. In the short term, the agency does not expect a complete suspension of business activities, given the importance of Agrokor's large retail network and other activities, as well as an agreement with creditors to freeze the repayment of debts, which gives the company the ability to continue operating.
In addition, the agency now sees a broadly based cyclical recovery of Croatian economy, with the support of many sectors. Therefore, it estimates that Croatian GDP will this year increase by 3.1 percent. “The potential fiscal effect on the state can also be handled, in our opinion,” says the agency.
According to information available to S&P, banks have agreed to provide Agrokor with 300 million euros in additional credit lines to finance short-term liquidity needs. “If the agreement with the banks fail and the government were to provide 300 million euros of liquidity – which we do not expect at this stage – that would expand the deficit by about 0.6 percentage points to estimated 2.8 percent of GDP, compared to our estimate of 2.2 percent. In addition, such a support should in any case have to be in line with EU rules on provision of state aid, which makes any direct state aid less likely,” concludes the report.
